1. How would you define internal balance in an open economy, considering the goals of full employment and price level stability? What are the potential consequences of both underemployment and over employment in terms of resource utilization and economic efficiency? (5 points)
2. Given the disruptive effects of an unstable price level on loan contracts, propose a set of policies that a government could implement to maintain price level stability and prevent large fluctuations in output. How would these policies contribute to achieving internal balance in an open economy? (6points)
3. How in practice does the Federal Reserve raise interest rates? In particular, what is the specific interest rate it targets, and what action does it take to change this rate? Briefly explain how the Federal Reserve's raising of interest rates affects household consumption, private savings, business investment, economic growth, and inflation in the short run. (6 points)